Portfolio Rebalancing

On July 23, 1996, Kerri Strug landed her second vault to guarantee the US women’s gymnastics team an Olympic gold medal. Despite going into the final rotation with a strong lead over Russia, Strug needed a solid vault performance to secure the win. She fell on her first attempt, injuring her ankle and imperiling the team’s victory, but she limped bravely back to the end of the runway for a second try. This time she nailed the landing, rebalancing her weight off the hurt ankle to solute the judges

Obviously, it won’t make you a national hero, but rebalancing your portfolio is a similarly the essential capstone to any successful investment year. You can save and choose efficient, diversified investments, but if you don’t rebalance your portfolio at least annually, your nest egg will quickly fall out of line with your investment goals.

So what is it?

Investment allocations are set based on an investor’s goals, age, and risk tolerance. For example, most people in their 20s and 30s would have an allocation of 90% stocks and 10% bonds because they are years away from retirement and have moderate risk tolerance. However, as their portfolio grows, one asset class is bound to out-grow the other, so the 90/10 allocation between stocks and bonds becomes out of balance. Therefore, investors must sell off part of the position that has out-grown its allocation to purchase more of the position that has not, rebalancing their portfolio to restore its ideal allocation.

Why does it matter?

Even the most passive investors should rebalance their portfolio because the proper mix of stocks and bonds reduces volatility and makes you more likely to sell high and buy low. Consider a portfolio with the previously mentioned allocation of 90% stocks and 10% bonds in a year where there is a significant rally in the market—the S&P 500 skyrockets, and the bond market takes a dive. It would be easy to get caught up in the emotion of a strong rally and think it will last forever, letting your stock positions continue to grow. But there will eventually be a correction, so rebalancing the portfolio by selling stock to purchase bonds will protect part of the gain and create greater potential for future gain on bonds.

How do you do it?

If you have an investment manager already, that individual should be rebalancing your portfolio at least annually and discussing these issues with you as well. If you prefer to do things yourself, I’m sure there are some people who are capable and willing to perform this function manually. But it would be much more prudent and efficient to use a robo-advisor like Betterment that leverages technology to rebalance portfolios and provide other valuable services at extremely low prices.


Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.